Why and where are house prices rising?



By Jeffrey Zabel·February 2, 2022

Tufts University

The problem:

The price of housing is of particular importance because housing is both a basic need and a key element of wealth. Around the start of the pandemic, some experts predicted a prolonged slump in house prices and the housing market. For example, in April 2020, staff at Freddie Mac house prices projected to fall 0.5% over the next year. In fact, the opposite happened: the Case Shiller National House Price Index increased by 15% between April 2020 and April 2021 while home sales reached a 15 years high in calendar year 2021. This contrasts sharply with the Great Recession, when the price index fell 44% between May 2007 and May 2009. But one similarity between the Great Recession and the COVID downturn is the large differences in house price changes. in different parts of the United States. What happened to housing prices during the COVID pandemic and why? And what are the wider economic implications?

Real house prices jumped 20% between February 2020 and September 2021 in the United States. But the degree of appreciation varied greatly from one city to another.


  • Home sales and housing construction fell at the start of the pandemic in March 2020. the total housing inventory on the market, including new homes and those being resold, decreased by 10.2% between March 2019 and March 2020. Between February 2020 and March 2020, housing starts decreased by 22.3%, perhaps reflecting the gloomy expectations of manufacturers for future demand. Total existing home sales fell 8.5% in March 2020 from the previous month and fell another 17.8% in April.
  • There has been a 20% increase in house prices relative to the headline inflation rate since the start of the pandemic. The year-over-year rate of increase of the Case-Shiller house price index was 2.4 percentage points above the rate of inflation of all other goods and services in February 2020. This gap, the real (i.e. inflation-adjusted) annual growth rate of house prices, has widened since then and was over 13 percentage points in each of July, August and September 2021. The cumulative effect of this was a 20% increase in real house prices between February 2020 and September 2021.
  • Strong housing demand and sluggish housing supply partly explain the rapid house price inflation. Low interest rates during this period made housing more affordable, as it reduced the cost of mortgage interest. Forced isolation and the shift to working from home have also contributed to a demand for more living space. On the supply side, pending housing listings (sales of existing homes and new builds) remained depressed, down more than 50% since the start of the COVID-19 pandemic. At the start of the pandemic, there was a shortage of construction workers and also of building materials. For example, the wood price more than doubled between February 2020 and May 2021 and, although the price has since fallen, it remained 63% higher at the end of 2021 than just before the start of the pandemic. More generally, there has been a long-term downward trend in housing stock. This decline continues despite the continued increase in new housing starts which, after a 40% drop between February and April 2020, recovered to pre-pandemic levels in the summer of this year and exceeded these levels in the last two months of 2021.
  • The strong overall growth in real house prices in the United States masks the dramatic variations between cities (see chart). In 2020, real house price growth was 15.8% for Boise but only 6.5% for Stockton, 4.6% for New York and 2.6% for San Francisco. In the first three quarters of 2021, this rate almost doubled to 30.6% in Boise, almost tripled in Stockton to 19.2%, but increased much less in New York (7.9%) and San Francisco (3.4%). Some of this gap reflects differences in demand, as people working from home sought more space and moved to peri-urban areas and smaller towns or left cities for other reasons related to quality of life and perceived health benefits due to the COVID-19 pandemic.
  • Beyond pandemic-related shifts in demand, a decades-long decline in the number of housing starts per household has helped limit housing supply. The last peak in housing starts dates back to September 2005, when the number of households was much lower than today. Between 1990 and 2020, the average number of housing starts per household was on average half that of the previous three decades. Freddie Mac felt that the housing shortage was 3.8 million units at the end of 2020. An increase in land use restrictions may be the main reason housing inventory has been so low over the past 30 years years.

High growth rates in real house prices have important distributional consequences, with existing owners enjoying a sharp increase in their wealth while potential buyers find themselves shut out of the market. One of the sources of the recent high real growth rate of house prices is the increased demand in peri-urban areas and small towns as remote working becomes more widely accepted. But a longer-term reason is the limited supply of housing. Recent efforts to reverse this trend and limit single-family zoning, such as in Minneapolis, Oregon and California, have had limited reach and have been met with significant resistance from current homeowners. Many other regional or statewide actions such as the Massachusetts Affordable Housing Inventory Act 40B which requires cities and towns to have a minimum of 10% affordable housing and the Mt Laurel in New Jersey which prohibits land use restrictions that limit affordable housing. for poor households are needed to seriously address this housing shortage problem.


Coronavirus / Housing

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